Amazon Prime Experiments With A Monthly Subscription Fee

Amazon (NASDAQ:AMZN) is experimenting with a $7.99 per month subscription fee for its Prime service instead of the current fee of $79 per year. The service offers free two-day shipping on millions of items, no minimum order size, unlimited instant streaming of thousands of movies and TV shows with Prime Instant Video and a Kindle book to borrow for free per month from Kindle Lending Library. The almost $8 per month fee costs an extra $17 per year but may still be attractive to customers who will rather spread their costs. The new pricing scheme also places it in direct competition to Netflix’s and Hulu’s streaming services that offer same monthly pricing plans. We think if the new fee is adopted on a large scale, it can help improve operating margins of Amazon, which reported its first quarterly loss in almost a decade in Q3.

The company competes with Netflix (NASDAQ:NFLX) and Barnes and Noble (NYSE:BKS) in the online content market.

Amazon.com is directly targeting Netflix by making its video streaming service available at the same price while rendering additional services. But Prime Instant Video currently contains only about 30,000 titles of movies and TV episodes, which is much smaller than the size of Netflix’s library. Hence, it will not be competitive just yet and will have to invest significantly into content to gain leverage. And with the latest episodes of current TV shows available on Hulu, Amazon has yet to position itself against these two competitors.

Amazon Prime, with its free shipping and free video steaming service, is a major contributor to Amazon’s expenses and has a decidedly negative impact on its declining margins. The 21% hike in annual price for the service will help the company parry its growing expenses to some extent. In an effort to not alienate its current members, Amazon is rolling out the option to newcomers only. The timing of the move should help the company leverage the coming holiday season as it recognizes the threat from its imploding earnings.

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